The European Central Bank on Thursday is expected to announce a new round of monetary easing, in order to allow the eurozone to weather the current global economic slump. But markets and economists have struggled to interpret the mixed signals sent by ECB officials in the last weeks, with cacophony rising ahead of what will be Mario Draghi’s last significant meeting as ECB president. According to most analysts, the ECB could cut its already-negative key rate further, embark on a new asset-buying program, and/or make its current long-term refinancing facility more favorable for eurozone banks.
Point No.1 – Hawks rising
Mario Draghi said in July that the central bank was considering all options to fight a slump that threatens to worsen due to the many uncertainties hanging over the world economy. Since then, the “hawks” – eurozone central bankers who have been sceptical of or opposed monetary loosening – have become more vocal. Led by Germany’s Jens Weidmann, the Bundesbank president, they are now arguing that the current situation doesn’t demand a new massive monetary easing plan. Draghi, on the other hand, has insisted that inflation expectations in the eurozone are showing that markets don’t believe in the ECB’s capacity to reach its (only) official goal of staying at the “below but close to 2%” level. It currently stands at an annual 1%. The ECB president has also pointed out that the current uncertainties weighing on economic activity – the threat of trade and currency wars, the slowdown in emerging markets, or Brexit – are already by themselves contributing to the slowdown.
Point No. 2 – Cacophony spreading
Besides the traditional hawks becoming more vocal, a new cacophony emerging among the monetary union’s policymakers has muddled the ECB’s message. That maybe because Draghi’s term expires on October 31, and the eurozone’s national central bankers already don’t feel bound by the same discretion they used to show when the Italian was clearly running the show. Finland’s Olli Rehn said last month that the ECB was preparing a “significant and impactful” package that would include “substantial and sufficient” bond-buying. On the other hand, France’s François Villeroy de Galhau expressed scepticism earlier this month on the need to resume bond-buying at the moment. It was unclear whether either one was expressing a personal preference or laying out the ECB party line. But it is a sign that Draghi’s successor Christine Lagarde may have to struggle to bring coherence to the central bank’s message, with a 25-strong ECB governing council that includes the 19 member states’ central bankers.
Point No. 3 – Markets doubting
No wonder that markets are now wondering whether the ECB’s package will be forceful enough to alleviate fears about the euro, which might strengthen if the plan is deemed too timid by investors. The common currency is down 3% against the dollar and up 1% against the pound (due to Brexit concerns) since the beginning of the year. A stronger currency would hinder the ECB’s stated goal of boosting inflation, because it would make imported goods cheaper. Prices have risen so little in the eurozone in the last four years, with the central bank constantly missing its target, that some economists are now suggesting it should openly adopt a “symmetrical” approach to inflation-targeting, i.e., explicitly announce that it is now aiming much higher than 2% on a temporary basis – after all, the ECB’s price target is supposed to be set for the “medium term.”
Point No.4 – Governments diddling
Draghi will undoubtedly yet again call for eurozone governments to do their (fiscal) part to fight the slowdown, in the form of public spending by countries who can afford it, such as Germany or the Netherlands. His appeals are likely to fall on deaf ears yet again, as they have in the last two years, in spite of the fact that Germany, the EU’s economic laggard this year alongside with Italy, is flirting with recession. Berlin is only considering the limited fiscal stimulus allowed by its stringent debt and deficit rules, but that would come after the recession or a serious slump has happened, not before. The incapacity or refusal of European governments to do more for their economies, coupled with stalled attempts at eurozone reform, should give ECB “doves” more argument to act. Knowing that what they decide Thursday will in any case be judged too little for some and too much for the others
Source : MTV
